Movie rental giant Netflix has just announced a totally new pricing structure. To the dismay of many of us netflix users, the price to stream + rent DVDs has almost doubled, from a price of $9.99 to $15.98. What does this mean for Netflix?
Netflix (NFLX) has been a stock darling for a while now, and the stock has skyrocketed over 400% in the past year and half. This topic has been beaten to death online, so I won’t dive into how many subscribers there are, or why the price ran so far, or why this stock is worth 83x earnings (where it currently sits at $291.27).
What I would like to talk about is moat, and how competition is only now beginning to take a toll on NFLX. Conservative investors know the value of an economic moat, and it’s pretty obvious that companies like 3M and McDonaldshave very strong ones. And it seemed, at least for a little while, that Netflix held a similar position.
For the past couple of years, Netflix was the only game in town. Blockbuster was all but dead, and except for those sidewalk RedBox’s, if you rented movies, you were a Netflix customer. Just look at their subscriber growth – from 6 million in 2006 to over 20 million today. It’s been nothing but blue skies for Reed Hastings.
But that could only last so long, especially in a young industry. Now, it’s time for the old guard to enter the business. Comcast is streaming shows from Fancast, and NBC has hulu-plus. Time Warner is going to start renting movies through facebook. We are transitioning from the initial excitement phase to the survival phase, were only a few winners will emerge.
If Netflix held the competitive advantage card, now would be the time to play it. But the rising consumer price proves that Netflix is worried. The companies the previously provided the content now want a piece of the rental action, and are dramatically increasing royalty fees. Some companies, like Sony, are already pulling out, effectively taking the middleman (NFLX) out of the game. Without producing it’s own content, NFLX is at the mercy of those that do, and many contracts will be ending in the next few years, leaving the negotiations open.
Some of the greatest companies out there don’t have this problem: you cannot take Coca-Cola out of the Coke game, or Phillip Morris out of the Marlboro game. You can’t work on Microsoft Word without Microsoft. But you can watch movies without Netflix.
While I am not invested in Netflix, nor do I plan to be, it reinforces in me some of my basic tenets of investing. If I were to own NFLX now, particularly if it was a large holding, I would be scared – will Netflix pull through? Will I wake up tomorrow $50,000 poorer? Without a dividend, I would live and die by those capital movements.
But as a dividend investor, I feel secure knowing that the companies I invest in have solid footing in their industry. And should the road ahead be bumpy, I know the dividend will still be paid, and most likely, raised. It’s times like these I am happy I’m a dividend investor.
DP, I gotta disagree with you a bit here. I’ve been a NFLX shareholder since 2008 and heard the same argument about competition ready to crush tiny netflix ever since it started getting “expensive” at $60 a share.
As for the price increase though, I think you’re right that it could mean trouble if customers revolt but it’s a little early to tell. If customers keep signing up though, all it means is that margins just got higher which is always a good thing for investors.
I buy a lot of dividend stocks in steady, stable, and mature industries. But since I have such a long time horizon (several decades to go), I also look for capital appreciation as a key part of my investment strategy. I understand the argument against high PE stocks, especially for investors that aren’t comfortable with tons of volatility. But for me, companies like NFLX are prime examples of market inefficiency (700% return in 3 years) and the possibilities of capital appreciation.
I wouldn’t recommend anybody buy in at these levels but at the same time I’m holding my shares and still not worried.
It depends. Not everything is black and white. If Amazon were just a book selling company, I wouldn’t give it much thought, but Amazon innovates. Whether it is cloud services or mechanical turk or Kindle or video on demand… that’s why Amazon will be far ahead of B&N or Borders.
I see Netflix in a similar vein. Netflix is a very innovative company. Pulling off a streaming technology is no easy task. Many tried and failed. Netflix started with Roku and wisely decided to sell it off.
I believe Netflix has more tricks up its sleeve. A number of media companies are thinking if Netflix can do it so can they. They thought the same with Apple and iTunes! Just because they own content doesn’t mean they can execute.
I agree that there must be more to the story. If other companies were able to execute and turn streaming into a commoditized business, then raising prices would be precisely the wrong thing to do. There must somehow be more to the story.
has more than doubled, from a price of $9.99 to $15.98
Better check your math 😉
Joking aside, I agree that Netflix is not a company I’d want to own right now. They just made a lot of people angry to increase profits. Subscription based companies have a very delicate balance when trying to increase profits by increasing costs. You need to add something to increase the price.
Ooops. My bad. I wrote this last night pretty late. Nice catch
It’s a tough situation. On the one hand, customers have gotten used to dirt cheap movie rentals. On the other, content providers want to get paid. The content providers made the first move, now lets see how the consumers react.
I was never interested in investing with Netflix, and even less so now.
Interesting question on the moat. I can only say that I watch free movies online all the time and for only a short time ever had a subscription service with Netflix. For the few times I want a truly high quality movie, I’ll rent for a buck at the local kiosk. I think this price increase is going to have a profound effect on Netflix.
Price increase has definitely made a negative effect to me as a customer.But for the quality I might go for it. I wrote a short technical analysis on NFLX and then found your blog writing about NFLX as well.